Preston Halperin: Should you invest in pot business?

Friday

Jan 13, 2017 at 5:34 PMJan 13, 2017 at 5:34 PM

By Preston Halperin

As a lawyer licensed in both Massachusetts and Rhode Island, I have been meeting with many Rhode Islanders who are intrigued by the possibility of profiting from the evolving cannabis industry. People are well aware of the “gold rush” in Western states such as Colorado, Oregon, Washington and soon California. In 2016, Colorado surpassed $1 billion in sales revenue from the cannabis industry. Closer to home, Massachusetts has recently legalized recreational marijuana, although retail sales will not begin until at least July 2018.

With relatively few new opportunities in Rhode Island for new business development, some Rhode Islanders are exploring the opportunity to profit from the cannabis industry. Is setting up a marijuana business today in Rhode Island a right for you? The answer is the lawyerly response, “it depends.”

What it depends on is your appetite for risk, your ability to withstand losses, and your willingness to place a bet on Rhode Island following Massachusetts into recreational marijuana. You must also bet that the incoming Trump administration will not reverse the current federal policy of ignoring the fact that marijuana is illegal under federal law.

As of today, only medical marijuana is legal in Rhode Island. A number of people are applying for and receiving licenses to become cultivators of marijuana, which means that they can grow it. However, it is critical to understand that a cultivator can legally sell to only three customers. Those three customers are the three state sanctioned “compassion centers": Summit in Warwick, Greenleaf in Portsmouth and Slater in Providence.

With a limited market of only three possible customers, some cultivators will discover that there are no buyers for their product. To make matters worse for those who invest in cultivation businesses, the three compassion centers can lawfully grow their own marijuana, effectively reducing the demand for marijuana grown by cultivators.

With a high cost of entering the medical marijuana business and a very limited marketplace to sell product, why are investors, growers and business people still interested? It’s simple. If recreational marijuana becomes legal, the cultivators will be in position to get out of the gate first and grab the brass ring. It takes many months to apply for a license, set up a grow facility and produce a quality product. If you wait until recreational marijuana becomes legal, there will likely be dozens of business people grabbing market share before you can even begin the lengthy process of starting a business from scratch.

So is this a good idea for you? Not unless you are willing to place a bet on recreational marijuana and you have the financial stamina to wait until you can legally sell to all Rhode Islanders. That means you must be able to sustain thousands of dollars in potential losses, paying for licensing fees, rent, employees, security services, electricity, water, supplies and a myriad of other business expenses.

If you have already built solid relationships with the compassion centers you might be one of the lucky cultivators who can make money or at least survive while waiting for recreational cannabis. Otherwise, you will need deep pockets and a lot of patience.

Preston Halperin is the managing partner of the Pawtucket-based law firm Shechtman Halperin Savage.